P92_Ch7 (Main accounting princples and practices)

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What is financial accounting?

Financial accounting is a business discipline which consists of a series of techniques and procedures that are used to identify, measure, record and communicate information, including financial information, about an organisation to a range of people who may be interested in it.

In what ways does mangement accounting differ from financial accounting?

Structure (a/c equation)

Sources (transactional/ varied)

Format (monetary / non-monetary financial information)

Time periods (historical / forcasts)

Regulation

Legal requirement to publish accounts

access to management accounting information

audit requirements

Who uses financial information?

Owners

Directors & managers

Employees

The public

Tax authorities

Financial analysts

Creditors & lenders

Competitors

Brokers

Customers

FSA

Define shareholders' equity

...the stake shareholders have in a company.

Calculating total value of assests less total value of liabilities

Define capital and regulatory capital

Capital: the sum of the equity and long term debt used to finance the business

Regulatory capital: the sum of the equity and long term debt that is classified as regulatory capital

What is a creditor?

...any individual / organisation to whom a debt is owed. Once the money is paid then the relevant accounting entries will be made to reflect the elimination of the liability and the reduction in cash available.

How is depreciation looked at on financial accounts?

...the cost of an assest will be apportioned over the financial period during which the business will benefit from the use of that assest.

Cost of asset - scrap or residual value

The life of the assest

What is the accounting equation and what does it express?

The a/c equation express the relationship between the things owned by a business and the funds which were used to buy them.

Assets = Equity + Liabilities

Assests (current & non-current)

Current (in use for less than one year)

Cash

Stock > raw materials, WIP & finished goods

Debtors

Non-current (in use for more than one year)

Goodwill and other intangible assets

Property

Investments

Liabilities (Current & non-current)

Current (> 1yr)

Bank overdraft

Trade creditors

Non-current (> 1yr)

Loans

Mortgages

bond issues

Long term liabilities (other than current & non-current liabilities)

Share Capital

Reserves

Working capital

...money used to pay for day to day trading activities. Used to pay for wages, raw materials and other overheads

Current assests - current liabilities

(aka net current assests)

Assests employed

Non-current assests + working capital

What statutory notes are found on insurance companies income (P&L) statements